good investment?

[FenderGuy]

A friend of mine has offered 35% of her new company for the next 2 years if I give her a loan of $30,000. Her company is a skin care line that she has been perfecting for the last 5 years. She has all her LLC paperwork and that legal paperwork. Not to pry in her financials, assuming she cant get a loan due to the costs over the past 5 years. Her products are great, and she has 5 major stores(with 5,000 stores nation wide) to distribute her products.

Should I investment?

[Chocaholic]

Sounds like you believe in her. Only you can answer your question. If losing your $30k would be devastating...think twice...if not, go with your gut. Everyone's threshold is different.

[on-ramp]

if you decide to do it, get it in writing. nothing can ruin a friendship like a bad business proposition.

[asphaltgambler]

You should look rationaly at the whole picture. You need to see ALL financial info, business plan, past and current sales, past and current net, future earnings, etc, etc.

It may be her company but it is YOUR hard earned money. What does the 35% represent? Complete ownership with all profits (and possible other debt) incured?

[Seahawk]

Originally posted by on-ramp
if you decide to do it, get it in writing. nothing can ruin a friendship like a bad business proposition.

+1 squared...get it in writing, both the entry and the exit.

[Don Plumley]

You have $30K to invest. Depending upon the potential return, you will tolerate different levels of risk. So to make in informed investment decision, you need to know what the money will be used for and what the projected return will be.

You said she's offering 35% of her company for $30K. Buying $30K of equity in her company implies that it is worth $85K today. Does the balance sheet support that assertion?

But you also called it a loan. Those are two different things. Is she offering a convertible debenture? In other words, is she asking for a loan that is backed soley by the equity in her company, and should the loan not be repaid, does it then convert to equity? Or is the conversion at your discretion?

Does the note pay interest (or principal and interest) - or are you getting back your $30K plus a share of the ownership of the business? If you are getting an equity interest, what is the liquidity event that will repay your loan? As a minority owner, what access to records, financials, etc. are you given?

I have a few hundred more questions that I'd be asking before I handed $30K to anyone, especially a friend.

If you are in it because she is a friend and not necessarily because this is a good investment - make sure you draft a simple promissary note plus a statement of how the 35% ownership in her company will become yours.

[FenderGuy]

Originally posted by Don Plumley
You have $30K to invest. Depending upon the potential return, you will tolerate different levels of risk. So to make in informed investment decision, you need to know what the money will be used for and what the projected return will be.

You said she's offering 35% of her company for $30K. Buying $30K of equity in her company implies that it is worth $85K today. Does the balance sheet support that assertion?

But you also called it a loan. Those are two different things. Is she offering a convertible debenture? In other words, is she asking for a loan that is backed soley by the equity in her company, and should the loan not be repaid, does it then convert to equity? Or is the conversion at your discretion?

Does the note pay interest (or principal and interest) - or are you getting back your $30K plus a share of the ownership of the business? If you are getting an equity interest, what is the liquidity event that will repay your loan? As a minority owner, what access to records, financials, etc. are you given?

I have a few hundred more questions that I'd be asking before I handed $30K to anyone, especially a friend.

If you are in it because she is a friend and not necessarily because this is a good investment - make sure you draft a simple promissary note plus a statement of how the 35% ownership in her company will become yours.

Do you have your series 7 & 63? You sound like what I am currently studying. You make very vaild points and this is what I am looking for. Her products will break the market, having tried them. I am just looking for a return on my loan.

Pm'd you

[lendaddy]

Indeed, if she is offering 35% of profits for two years I would be very afraid. $35k is nothing and if she cannot conventionally get it, then I highly doubt her company is turning any profit at all. 35% of 0 =0.

Maybe I missed something.

[Don Plumley]

Originally posted by FenderGuy
Do you have your series 7 & 63? You sound like what I am currently studying. You make very vaild points and this is what I am looking for. Her products will break the market, having tried them. I am just looking for a return on my loan.

Pm'd you

Thanks - no. Just an old entreprenuer and moderately successful General Manager.

Wayne - the 35% was the percentage of something - revenue, gross margin, net income, etc.

FenderGuy - You call it a loan, so you need a risk adjusted return on your loan.

1) What is your loan secured by? The goodness in her heart? Equity? Her Car?
2) Depending upon the level of security provided, you determine an acceptable risk adjusted return. Say 20% per annum.
3) Then you decide if you want interest plus principal repaid over what period of time, starting when. As I mentioned in the PM, I wouldn't want her making payments out of tommorrow's cash flow.
4) Convertible Debenture - the best way to invest in a small business.

[Jims5543]

I am looking into launching a product in the very near future. I cannot go into it right now.

Running the numbers I can tell you it is going to take 5 years to turn a respectable profit. 4 years if we are lucky. My initial outlay is going to run me around 35K plus marketing. Every penny I make will have to be sunk back into it for the next 4 years minumum to make it a real profitable venture.

With her limiting you to 2 years of the profit I say forget it.

If she wants to keep you on board for the long run then do it otherwise its not a very good deal.

Now, if she really does have 5 chains with potentially 25,000 stores nationwide her entering into profit may be way sooner than my plan. It "might" be worth it but I would honestly look into a longer period like 4 years. Preferrably 5.

Or a 2 year baloon on the loan paying back a total interest that makes it all worth your while.

[FenderGuy]

Jim


If I do go through it I was going to ask 35% for year and 25% for 3 years, I too was thinking a 5 year period of investing

[tabs]

Why don't U ask for an Equity Stake in the co. Presumably she is a Corporation and a miniority stake would be nice, along with the repayment of the loan. U are there on the ground floor.

I gave a relative a small amount of money for a 5% stake in his Ltd. He in turn owns 50% of the consulting arm ( Intellectual Property for the Security Devices) of the Ltd that provides Jaguar, Range Rover and Aston Martin their Car Security Devices. He also agreed to repay the small amount of money over a 4 year period.

I gave him the money feeling my worst case scenerio was that it was a gift to a relative, and on the other hand the possibility for that Gulf Stream was there.

[charlesbahn]

R U nuts? Run Forest Run.

Just my .02.

[Jims5543]

I had the opportunity to purchase a competitors company 6 years ago. At the time my company was 2.5 years old and finally turning a small profit, enough for me to make a decent living.

I did not have the $25K I needed to buy at that moment. My friend offered to loan it to me for 1 year. I had to pay him back in one year, $25K plus another $2500 on top. I think that was a 10% return on his investment for one year.

He did not want a percentage or piece of my company just to make a small profit on his money invested. All parties involved were happy with the terms.

Food for thought.

[lowyder993s]

OTOH...I invested in a co where I knew the sister of the founder. She is SHARP! Her husband worked for me. Her brother had a track record in the business and SUPPLIERS were helping him ramp up for a stake in the co. Short story long, 5 year prospectus exceeded in less than 2 yrs. Going public end of year, start of next. They turned down a private buyout @ 40x what I got in for. It's gonna be a very interesting new year.